If you’re starting a new business that manages multiple outstanding invoices, it can be daunting to wait until the work is completed before the customer pays the invoice. It can also prevent you from growing your business as fast as you would like. One solution to this is accounts receivable financing.
What is accounts receivable financing?
Accounts receivable financing is a type of financial arrangement where companies with outstanding invoices send a portion of them to a financial institution. This process allows companies to receive early payment on unpaid invoices, letting them fund their business faster and pay regular operating costs without worrying over money.
In general, accounts receivable financing is easier for businesses to obtain than other types of funding. Small companies may have an easier time meeting the requirements for accounts receivable financing, especially for those with a less than prime credit history or no credit history at all.
There are two major types of accounts receivable financing. Most often, accounts receivable financing is structured as an asset sale. In this arrangement, the company sells its accounts receivable to a financer. It is similar to the way banks sell portions of a loan. Accounts receivable financing can also be structured as a loan agreement. One of the best advantages of a loan agreement is that the accounts receivable are not sold. Instead, a company gets an advance based on the accounts receivable balances.
Accounts receivable financing has many advantages for small businesses, including the ability to access instant cash without jumping through hoops or dealing with long waits associated with traditional business loans. Companies also don’t have to worry about repayment schedules or collections. With two different financing methods, accounts receivable financing can be a great alternative to traditional or SBA loans.